Business activity often requires additional funding. As an example of the reasons for the decision to increase equity capital, the risk of liquidity loss or the planned investment requiring significant investments can be identified.
In the case of commercial law companies, obtaining additional funding may consist in obtaining external financing – for example by obtaining a working loan – or recapitalisation of the company by its shareholders. In particular, the recapitalisation of the company may take the form of an increase in share capital, subsidies and loans.
Increase in share capital
Increases in share capital in the Polish limited liability company. Article 257 And another k.s.h.
In deciding to recapitalisation by raising the share capital, it should be borne in mind first of all that the characteristic feature of the share capital contribution, both with the company's bond and with a subsequent increase, is the general prohibition on repayment of contributions during the company's duration (Article 189(1) (k.s.h.)[1].
The exception to the principle of prohibition of repayment of contributions is the repayment of the shareholder’s shares or the reduction of the company’s share capital. It is worth noting, therefore, that in the future, the recovery of the money (or the aport) paid for the increase of KZ will require an additional procedure.
The increase in share capital may only take place on the basis of the provisions of the company's agreement with the o.o. providing for the upper limit of the share capital increase and the date of the increase, or by amending the company's contract.
At this point, it is worth pointing out that the procedure for raising the share capital on the basis of the existing provisions of the company's agreement with o.o. depends on the content of these provisions. In a specific case, they may grant the power to increase both the Shareholders' Assembly and the Management Board.
The form of the share capital increase may consist in an increase in the nominal value of existing shares or the establishment of new ones (Article 257(2) (k.s.h.)[2].
The increase in the nominal value of the already existing shares is aimed at existing shareholders. Where the articles of association provide that the shares in the company are equal and indivisible, the increase in the nominal value of the shares must be mandatory for all shares and therefore be proportionate for all shareholders of the company.
Unlike the increase in value, the issue of new shares can be directed both to existing and new partners. However, existing partners have a model (although a company agreement or an increase resolution may regulate this issue differently) the right of priority to include new shares in the increased share capital compared to their existing shares. The right of priority shall be exercised within one month of the date of the call for enforcement.
As per content Article 258(3) k.s.h. and 259 k.s.h. a statement of participation in new shares or an increase in the value of existing shares/shares requires the form of a notarial act. In the case of new shareholders, such a declaration should also include joining the company.
In addition, an important increase in the share capital of the company is effective only when entered into the national business register. It is therefore a procedure to be planned in due time, taking into account the likely length of the registration procedure.
Payments
The institution of subsidies in a limited liability company has been regulated in Article 177-179 k.s.h. In code terms, the subsidies are the cash contributions of the shareholders to the company, which is intended to fund the company’s capital backup. The obligation on shareholders to pay subsidies requires prior regulation of this issue in the articles of association. It is therefore worth remembering the institution in question when formulating the text of the partnership agreement.
The imposition of subsidies is made by a resolution of the Assembly of Shareholders by an absolute majority (cf. Article 245 k.s.h.), where the articles of association may impose stricter terms. A resolution imposing on shareholders the obligation to pay fees should specify their amount and deadlines.
The adoption of subsidies creates a claim on the part of the company (claims) against shareholders to pay them. The doctrine of commercial law indicates that subsidies are optionally reversible[3] – the reimbursement is subject to a separate resolution of the Assembly of Shareholders on this matter.
As per content Article 177(2) k.s.h. the subsidies should be imposed and paid by the shareholders equally in relation to their shares. Similarly, upon reimbursement of the contributions to the partners, the reimbursement should be implemented evenly to all partners (Article 179(3) k.s.h.).
The dispute remains whether, in a specific case, the aid may not be proportionate. However, the view that approves such a possibility is not isolated[4], if such action is considered effective, the tax risk must be considered to be[5].
The recapitalisation of the company with the use of an institution of subsidies should be assessed in terms of formalisation as an indirect solution between the increase in the share capital of the company and the loan.
In principle, the adoption of the payment obligation and their reimbursement to the partners require the adoption of an appropriate resolution of the Assembly of Shareholders. However, unlike the share capital increase, there is no need to make any claims in the form of a notarial act.
The adoption of aid shall also not be subject to a registration court.
Loans
The loan should be assessed as the least formalised method of obtaining the company’s financial resources. The agreement should in principle be concluded in documentary form.
The loan agreement must be understood to mean the liability ratio by which the lender undertakes to transfer to the owner of a certain amount of money or items designated only for the species, and the borrower undertakes to return the same amount of money or the same amount of property of the same species and quality.
In case of co-financing of the company using this institution, the parties to the agreement are, respectively, the company - the borrower and the lender partner.
A characteristic feature of the loan agreement is therefore the obligation to reimburse its amount, which is modelled by the obligation for the borrower to pay the relevant interest to the lender. The term of the loan agreement is typically defined in the contract itself.
Such a solution protects the borrower as it allows him to anticipate in advance the date of the update of the obligation to repay the loan.
In the absence of appropriate provisions of the Agreement, the Article 723 k.c., according to which the debtor is obliged to repay the loan within the period six weeks after the lender terminates the contract.
Tax issues
When deciding on a specific form of recapitalisation of the Polish limited liability company., it is worth taking into account the tax characteristics in addition to its legal characteristics, including the degree of formalisation. The differences in the tax consequences of the various solutions are described in detail in the article “The financing of the company by shareholders by increasing share capital, subsidies and loans and tax consequences”. We encourage you to read it.
[1] Rule of Article 189(1)) k.s.h. applies not only to contributions to cover the company's share capital, but also to contributions to the increase in share capital, in excess of the share held by the shareholder agio) and transferred to the reserve.
[2] We encourage you to read the article “Methods of increasing the capital of the Polish limited liability company.” – LINK, in which we discuss this subject in detail.
[3] Z. Jara in: Code of Commercial Companies. Commentary, ed. Z. Jara, comment on Article 177 k.s.h., Nb 3, Legalis/el.
[4] Por, among others, A. Opalski in: Commercial Companies Code. Commentary, ed. A. Opalski, comment on Article 177 k.s.h., Nb 14, Legalis/el.
[5] Cf. judgment of the Supreme Administrative Court of 19 December 2006 II FSK 26/06.
Author: Paweł Postolko
Lawyer, graduate of Law at the Faculty of Law and Administration of the Jagiellonian University, where he then completed Postgraduate Studies in Economic and Tax Criminal Law. With the law firm Russell Bedford connected from 2021. His professional interests are economic law, taking into account criminal and economic issues. He has practical professional experience in handling court cases.